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I'm in my 20s and rent. I recently started thinking about whether I want to own. Before then, I didn't really understand the economics of mortgages. I did the math on the condo I live in and realized that, in terms of monthly expenses, I'm way better off renting. In fact, buying seems completely ludicrous.
Consider. The unit I rent is worth ~$400k and I pay $1500/mo. Let's say I bought it with 20% down. With current interest rates, that means in the first year I'd be paying $320,000 * 0.0425 / 12 = $1133 per month in interest alone. Add in HOA dues of $400/mo and you have $1533/mo. The mortgage payment would be an additional $1574/mo and the property taxes would be $341/mo and the home insurance would be about $140/mo. That means that the total cost per month if I owned the thing would be $3628 and that doesn't even include costs such as remodeling.
In other words, by renting, I am able to live in something condo that is 2.5x what I could afford to live in if I bought, and I have tens of thousands of dollars more to invest (which compounds and grows much faster than the appreciation on a house does) per year.
Sure. That would require you to have and to invest all that money. It would also have to assume your rent will always stay at the same cost. It won't. Add 5% a year increases average. Your income would need to go up in line with rent rate to at least keep your head above water otherwise eventually rent wins out
That is until your LL or the family decides to sell or get greedy and jack your rates 10%. Most renters DO NOT INVEST. On average 40-50% of your income goes to rent. (I don't like to see anything over 40% ratio. 25% would be great but 35% is very acceptable. )
A house appreciation may not be fast BUT you will always have a set monthly payment for 30 years.
Ok. Here is one for you. I bought a house when I got maried. As time went on the rent of a similar dwelling surpassed my monthly house payment. Today to rent the same dwelling it would cost you TWICE what my monthly mortgage was.
Having a low payment allowed me to invest and save money. I was able to put enoug away for another down payment in a different house. Made my old house a rental. It's worth about 3.5x what I paid for it. Sure I'm not out there moving and shaking the financial world but I'm still making money in a very safe relatively risk free manner.
What was helpful was knowing what my monthly was. Not only that I had a freaky good idea what my utilities and other costs were, I could create a budget. I could project my expenses and adjust.
I never borrowed against equity. The only thing I did was refi from a 7.85 to a 4.25 10 years ago. It allowed me to lower my payment and accelerate the payoff.
Last edited by Electrician4you; 05-14-2017 at 09:59 PM..
A lot of people can't afford those rent increases when they retire. The problem with renters is they don't take those short term savings (the difference on cost between renting and buying a place) and invest them. Instead, the money gets spent and the renter spends old age nearly 100% dependent on a measly Social Security check and possibly some meager savings, leaving no room to absorb rent increases, and possibly no ability to pay rent at all.
I'm not saying the above scenario is inevitable, but it is typical. I'm a renter myself and know I need a larger investment portfolio to make up for the fact that I'm not going to own a home. But I am not a "normal" renter.
A lot of renters cannot "save and invest the difference" because their lower incomes do not afford them a disposable surplus after paying the rent. (Remember, median renter income is 50% of median homeowner income - that is a LOT of money not available year after year to half of all renters.)
Because homeowners (as dominant constituencies of most municipalities) effectively set the zoning and housing rules, most renters cannot find and procure the most affordable housing they need in order to be able to save for the future. Faced constantly with The Rent Is Too High, those lower income renters never own, never stabilize their housing costs long-term, and, if they live long enough, reach retirement age unable to afford to retire.
Sure. That would require you to have and to invest all that money. It would also have to assume your rent will always stay at the same cost. It won't. Add 5% a year increases average. Your income would need to go up in line with rent rate to at least keep your head above water otherwise eventually rent wins out
That is until your LL or the family decides to sell or get greedy and jack your rates 10%. Most renters DO NOT INVEST. On average 45-50% of your income goes to rent.
A house appreciation may not be fast BUT you will always have a set monthly payment for 30 years.
Ok. Here is one for you. I bought a house when I got maried. As time went on the rent of a similar dwelling surpassed my monthly house payment. Today to rent the same dwelling it would cost you TWICE what my monthly mortgage was.
Having a low payment allowed me to invest and save money. I was able to put enoug away for another down payment in a different house. Made my old house a rental. It's worth about 3.5x what I paid for it. Sure I'm not out there moving and shaking the financial world but I'm still making money in a very safe relatively risk free manner.
What was helpful was knowing what my monthly was. Not only that I had a freaky good idea what my utilities and other costs were, I could create a budget. I could project my expenses and adjust.
I never borrowed against equity. The only thing I did was refi from a 7.85 to a 4.25 10 years ago. It allowed me to lower my payment and accelerate the payoff.
A lot of renters cannot "save and invest the difference" because their lower incomes do not afford them a disposable surplus after paying the rent. (Remember, median renter income is 50% of median homeowner income - that is a LOT of money not available year after year to half of all renters.)
Because homeowners (as dominant constituencies of most municipalities) effectively set the zoning and housing rules, most renters cannot find and procure the most affordable housing they need in order to be able to save for the future. Faced constantly with The Rent Is Too High, those lower income renters never own, never stabilize their housing costs long-term, and, if they live long enough, reach retirement age unable to afford to retire.
We know this post is about you. Based on what you've told us in other posts, your real problems have nothing to do with low income. Low income is just the symptom of other emotional / psychological problems you're unwilling or unable to address, I'm not sure which (although I lean toward unwilling).
Being poor and complaining about it is your comfort zone. 29,000 posts on the same thing....and counting.
If you buy a home, you are paying yourself, & not the LL. It is part of long term planning.
Depending on what source you believe the average time spent in a purchased home can be as low as 6-7 years. You don't make much of a dent in principle in that time with a 30 year mortgage so most of what you paid didn't go to you, it went to interest, closing costs, insurance, property taxes, maintenance, and upkeep.
Not saying renting is a better financial move (it depends) but most homeowners writing monthly checks don't actually pay a lot to themselves, home appreciation is often the bigger gain in the time frame they own and it doesn't necessarily outpace transaction cost.
Most people buy homes for reasons beyond a financial one. Me? I have a dog and plan to always have a dog and decent rentals can be hard to find when you have pets. I also want to be free to improve my home as I see fit. Yes, there are financial reasons too, but it's not my only reason. It's not even the biggest reason.
Yep, lifestyle choice is often the best driving factor in the own versus rent decision. We don't have kids and but do have a nomadic spirit so owning doesn't make sense for us at this point in our lives. Right now there is no way could we look at a property and say yeah this is where we want to live for the next 10/20/30 years.
I'm in my 20s and rent. I recently started thinking about whether I want to own. Before then, I didn't really understand the economics of mortgages. I did the math on the condo I live in and realized that, in terms of monthly expenses, I'm way better off renting. In fact, buying seems completely ludicrous.
Consider. The unit I rent is worth ~$400k and I pay $1500/mo. Let's say I bought it with 20% down. With current interest rates, that means in the first year I'd be paying $320,000 * 0.0425 / 12 = $1133 per month in interest alone. Add in HOA dues of $400/mo and you have $1533/mo. The mortgage payment would be an additional $1574/mo and the property taxes would be $341/mo and the home insurance would be about $140/mo. That means that the total cost per month if I owned the thing would be $3628 and that doesn't even include costs such as remodeling.
In other words, by renting, I am able to live in something condo that is 2.5x what I could afford to live in if I bought, and I have tens of thousands of dollars more to invest (which compounds and grows much faster than the appreciation on a house does) per year.
There are people on the planet that do not finance anything, including their home and vehicles so they have no interest to pay anyone. Closing is quicker, less hassle, little paperwork and the deed can be transferred in a couple weeks *in our area*.
There are also people who buy a home and do not immediately spend thousands of dollars more to remodel.
In your case you know you do not want to own a home, in our case we wanted to own a home and a wee bit of property so we saved and paid cash for our home on 1 acre. This decision is right for us, your decision is right for you.
In the long run, buying is better, if you don't buy during a bubble and interest rates are decent. We bought 18 years ago and have carried our equity to subsequent home purchases. We couldn't rent a 2-bedroom apartment for what we pay monthly for our 5-bedroom house now.
In other words, your rent will continue to go up. A house payment stays the same.
I am generally in favor of owning property rather than renting, but I would like to point out that in my opinion and my experience the mortgage interest deduction is usually oversold as a cost reduction.
1) The actual cost reduction is your marginal rate times the amount your mortgage interest paid exceeds your standard deduction. So as an example, if you paid $15,000 in mortgage interest, and your marginal rate is 25%, the 2017 std. deduction for MFJ is 12,700, so your cost savings is 0.25 x (15000-12700) = $575.00. I certainly wouldn't refuse $575.00 if it was available to me, but it's not enough to make a decision one way or the other.
2) The lower interest rates are, the higher your loan balance has to be, to get the benefit of the mortgage interest deduction.
3) The more prudently you live (keeping total housing costs low, putting a larger down payment, etc.), the less benefit you will get from this deduction.
4) Of course, owning a house provides no tax benefits at all if you own it outright. At my age (mid 50s) I have to consider very carefully the wisdom of signing up for a mortgage when the reality is that sometime in the next 10 years I will probably be without a regular income, either by choice or due to age-related layoffs. So I am only interested in getting a mortgage if I can write a check at any time to pay it off, should this be needed.
In general, my take on the mortgage interest deduction is that it provided significant benefit during the days of high interest rates, to younger buyers who were putting down the minimum and financing houses they could barely afford in the expectation of rapidly rising income during their 20s, 30s, and early 40s. For people who were in that slot in say the early 80s through the early 90s, it was a meaningful contributor to the rent vs. buy decision. Today, I think it is significant to far fewer people, and it really should not be listed in the leading reasons to buy vs. renting.
To the OP's proposition, anyone who is paying $1500 rent on a property worth $400k can expect the rent to be raised soon. In general, you can expect that a landlord would charge a rent that is higher than the market cost for the property. If you were to buy a $400k house/condo with 20% down, your monthly cost just to service the loan and taxes would be higher than $1500, then add the cost of repairs, plus a profit margin for the owner, and you come out well north of $1500 as a market value rent for that property. My guess is that the property being rented for $1500 is not worth $400k but rather something closer to $200k, so the market rent on a $200k unit would probably yield a useful profit for the owner (I haven't done the back of the envelope calculations on this one, so please don't come back with a bunch of picayune reasoning about how my WAG is 1.04657% off.)
A lot of renters cannot "save and invest the difference" because their lower incomes do not afford them a disposable surplus after paying the rent. (Remember, median renter income is 50% of median homeowner income - that is a LOT of money not available year after year to half of all renters.)
Because homeowners (as dominant constituencies of most municipalities) effectively set the zoning and housing rules, most renters cannot find and procure the most affordable housing they need in order to be able to save for the future. Faced constantly with The Rent Is Too High, those lower income renters never own, never stabilize their housing costs long-term, and, if they live long enough, reach retirement age unable to afford to retire.
ALL an income problem. Period.
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